Healthcare professional liability loss costs continue to
rise, fueled by increasing claims severity, while claims frequency remains
fairly stable, according to a just-released, 14th-annual study by Zurich North
America.

In the 2019 Benchmark Study of Healthcare Professional
Liability Claims, Zurich draws data from the more than $16 billion in losses
contained in its claims database of around 90,000 actual and ultimate claims
between 2008 and 2016. It examines claims frequency and severity trends for
different types of organizations, facilities and communities. The study also
includes an in-depth analysis of claims reporting times — from accident to reporting
as well as from reporting to settlement — identifying a strong correlation
between severity of claims and settlement lag.

Claims Severity: A
Steady Ascent

According to the 2019 Benchmark Study, year-over-year
changes in loss cost appear to be severity-driven, given a relatively benign
movement in frequency. The implied annual trend in loss costs on an unlimited
basis is approximately 4.6 percent from 2008 to 2016, consistent with industry
views of increasing trends for healthcare professional liability.

Average claims severity rose at an annual rate of 5 percent
between 2008 and 2016. However, that trend is not uniform across all
territories. Some — like Illinois, Maryland, New Mexico and Pennsylvania — are
witnessing a significant increase in severity. While these states exhibit both
high severity and volatility, they are each trending in line with the national
average.

In the Zurich dataset, there are almost 3,400 claims with an
ultimate loss value greater than or equal to $1 million. While these claims
represent just over 4 percent of total ultimate claims, in terms of loss
dollars, these large losses amount to almost 60 percent of developed losses.
With further breakdown, 63 percent of the claims fall into the bucket from $1
million to $2.5 million — however, the percentage of loss dollars in this
category is only 31 percent. In contrast, losses greater than $5 million
account for only 15 percent of the number of losses above $1 million, but
represent almost 44 percent of the ultimate loss amounts.

The study’s authors found that nonprofit hospitals
experience a higher severity trend than for-profit hospitals. Zurich theorizes
that aggressive claim management, differences in case mix index and patient
populations could be contributing factors driving the lower average severity of
for-profit hospitals.

The study also found that average claims severity for
children’s hospitals and teaching hospitals remains significantly higher than
for other facility types, despite the lower frequency of claims at children’s
hospitals. In past Benchmark studies, Zurich emphasized that providing lifetime
care is potentially driving the higher severities in children’s hospitals; teaching hospitals may be experiencing this
as well, due to their exposure to high-risk obstetrics cases, which can result
in lifetime care for injured neonates.

Looking at Zurich’s raw counts of claims greater than $1
million as a proportion of total ultimate claim counts helps shed light on
severity drivers. The high severity of claims from teaching hospitals is driven
by a large quantity of large claims per year, rather than skewed by just a few
very large claims. Teaching hospitals represent only 16 percent of the ultimate
claim counts in the Zurich database, yet represent 26 percent of claims greater
than $1 million. For acute care, the relationship is just the opposite, where
acute care ultimate claims represent 72 percent of claim counts in the Zurich
database, versus 65 percent of claims greater than $1 million.

Claims severity continues to be higher for facilities in
urban areas than those in rural and suburban areas. The spread between the two
groups in terms of actual dollars has changed over time, but on a relative
scale they are mostly stable, hovering around a ratio of 1.15. In other words,
on average, urban claims are approximately 15 percent more expensive than
rural/suburban claims.

Average Time from
Reporting to Settlement

New to this year’s Benchmark Study is an analysis of the
time lag from reporting of a claim to settlement and how it affected severity.

Analyzing closed claims only, and comparing the average time
from reporting to settlement versus the average severity, Zurich found claims
that settle quickly have a significantly lower severity than those that take
longer to settle. The average severity for claims settled in less than one year
steadily increases from $33,000 to $560,000 for claims that take longer than
five years to settle.

Zurich also studied the distribution of the average time
from reporting of a claim to settlement of a claim, delay between accident and
reporting of a claim and the difference by facility type versus severity.
According to the data, outpatient facility claims settle faster, with 49
percent settling within the first year with an average severity of $94,000. In
line with their significantly higher severity at $430,000, only 39 percent of
children’s hospital claims are settled within the first year.